PIRATING AND COUNTERFEITING IN CHINA

PIRATING AND COUNTERFEITING IN CHINA

Fake, pirated or counterfeit items sold or made in China are found throughout China and the world. In the mid 2000s, it was estimated that 90 percent of the movies, music and software sold in China was pirated. The market value of pirated and counterfeit goods produced in China is estimated at between $19 billion and $24 billion a year in 2003. Trade groups say illegal Chinese copying of music, designer clothing and other goods costs legitimate producers billions of dollars a year in lost potential sales. By some estimates counterfeiting and piracy costs companies that produce the originals $16 billion in sales worldwide.

A study by the Business Software Alliance estimates that if software piracy was eliminated worldwide 2.4 million jobs, $400 billion in economic activity and $67 billion in tax revenues would be created. The study suggested that China could create 2.6 million new jobs in information technology if piracy was sharply reduced. A similar study by Organization of Economic (OECD) valued pirated products worldwide in 2006 at $176 billion, almost the same at the annual trade between Japan and the United States.

There is little understanding or respect for the idea of intellectual property. There is no stigma attached buying or seven selling pirated goods even with a phony brand names like Sone instead of Sony. The government quietly tolerates pirating and fake good manufacturing to some degree because they provide employment for large number of people laid from state-owned enterprises.

The Japanese went through a similar stage in their development---copying many American and European products. Japanese companies and the government cracked down on the practice when Japanese companies needed laws to protect their intellectual property rights. It is assumed that the same will happen in China as the country becomes more developed and its companies and business practices more mature.

Pirating may be a good way to make some quick profits but is damaging for future development. One reason is that firms won’t invest in research and development if the know whatever products they create will be ripped off.

In some cases among the largest buyers of fake goods in China are foreigners who load up on fake Rolexes, DVDs and electronics, Murray King of APCO Worldwide told the Washington Post, “Far too much has been made about the Chinese market and not enough about the foreign appetite for fake goods. By some estimated two thirds of 15 million shoppers a year at Beijing Silk Street market are foreigners.

Good Websites and Sources: Paper on causes of Counterfeiting peteryu.com/guanxi ; 2010 AFP Article google.com/hostednews/afp ; Counterfeiting and Development in China uscc.gov/hearings ; World Intellectual Property Organization newsletter pdf file wipo.int/enforcement

Fake and Counterfeit Products in China

Commonly counterfeited products include CDs, computer software, foreign cigarettes, medicines, watches, wines, auto parts, books, Tibetan jewelry, Qing coins, Marlboro cigarettes, Sony Walkmens, Maxell tapes, Apple I-pods, Sony Playstations. Rolex watches, Coca-cola, Pabst beer, "Chrysler" jeeps, fake train tickets, 100 yuan notes, lottery tickets and certificates that state antique items are genuine. Watch out for packages of tea with John Deere logo.

In markets in Shanghai you get good knock offs of Louis Vuitton bags for $25, North Face jackets for $26, Cartier wallets for $15, Callaway and Taylor-Made golf clubs fr $12.50 and Wilson tennis racket for $10. If a customer doesn’t see what he wants he can leaf through a counterfeit goods catalog and order a copy of what he likes. Truck parts, brake pads and pharmaceuticals are also available. Companies are sometimes reluctant to advertise because often all that does is boost sales for the counterfeiters.

Counterfeit banknotes are so common cashiers scrutinize every 50 yuan or 100 yuan ($6 or $12) bill. In stores you can find Chinese oranges with fake Sunkist labels. Even Deng Xiaoping's Collected Works has been pirated. The latter is filled with errors such as: "We must take Marxism as dogma instead of "We must not take Marxism as dogma."

Fujian and Guangdong Provinces are regarded as hotbeds for counterfeiting, pirating and forgery. Guangdong is home to a thousands of factories that produce counterfeit goods, many of which also produce legitimate products. Fujian is considered the place to go for forged securities, documents and gift certificates. There are printing facility there that can expertly copy of any coupon, certificate or voucher---even those with holograms---that are given to them.

Some towns specialize in counterfeiting one line of products: Wengang for pens; Taizhou for auto parts; Chaozhou for cosmetics.

Famous trademark names of Japanese sake brewers have been registered in China without permission of the real brewers.

Counterfeit copies of Apple iPhone are available. The products often appear about one or two months after the genuine articles go on sale, have many of the same capabilities and cost only a fifth of the price of the original.

1) Fake Baby Formula. See Severe Food Problems, Food, People and Life; 2) Counterfeit Beer, See Drink, People and Life; 3) See Chevy Spark, Automobile Industry.

Fake and Counterfeit Luxury Goods in China

Counterfeiting of luxury goods is very common. Louis Vuitton wallets sell for as little $4. Prada, Louis Vuittin, Burberry, Hermes, Ralph Lauren, Givenchy and Chanel are particularly popular with counterfeiters and shoppers. High quality Gucci and Prada bags come complete with forged certificates.

Counterfeiting is a problem both in China and outside of it. Three fourths of all the luxury goods seized at ports in France and Italy originate in China. Suppliers who sell these goods often ship the labels separately from the goods and are sewn on after the goods clear customs. The producers also often produce the goods and labels in separate locations to avoid detection.

The quality of counterfeits is improving. Some times even pros are fooled and counterfeits have made their way into legitimate distribution channels and end up in stores where people think they are buying the real things. One study by Itallian authorities in the early 2000s found that fake Rolex watches were so well made---including the internal identifying marks like those stamped inside real Rolexes---that even people at Rolex had difficulty distinguishing them as fakes. Sometimes as much as $2,500 would go into making a counterfeit Rolex that sold for $12,000 or more in a jewelry shop.

The same study found that parts for luxury goods were made in southern China flown to Europe and then tucked into the floor of vehicles and assembled and distributed under the guidance of Camorra (the Naples mafia) with final touched put on by Venice craftsmen.

Most buyers know that what they are buying is not real thing. A media executive in Shanghai who earns $80,000 a year told the Washington Post: “I realized the quality of counterfeit stuff is not bad at all, and the price is one-tenth of the real products. I have never felt embarrassed to carry a fake. I have good taste, and I know what is quality and what is isn’t....It is not as if I buy the bag just because of the brand. It has to be a style I like.”

Pirated Music in China

Piracy accounts for 95 percent of the music and CD sales in China. On the streets of Shanghai it possible to buy CDs by Western artists such Pink Floyd, Madonna, Michael Jackson, Sting, Leonard Bernstein, Bon Jovi and Sinead O'Conner for a little as 50 cents a piece. Local favorites, such as "Red Sun," a collection of popular Chinese revolutionary songs, are also available.

Pirated music grosses $2 billion a year and accounts for 5 percent of the $40 billion music industry. The pirated music trade is well organized and has ties with organized crime. China reportedly has 40 factories producing compacts discs, most of which are purchased domestically.

The sale of CDs and DVDs, including pirated copies, increased from 63.4 million in 1994 to 80 million in 2000 to 109 million in 2001.

Effect of Piracy on the Music Industry

Record companies don’t even bother with traditional album style record contracts or setting up distribution networks and instead concentrate more on talent management and making money in ways other than selling recordings. New artists have to spend their own money to promote themselves because record companies can’t do it.

Only 20 or so professional-quality albums are produced a year in China. Star musicians make their money from appearances, live performances and endorsement deals. Concerts have become big promotions, with several artists sharing the stage so sponsors get the most bang for their money. An industry-created all-girls group called Mei Mei group had a two year contract with M&M candy before any members had even been selected.

The singer Wang Lee Ho told the International Herald Tribune, “Pirates have already killed China’s music industry dead. It frustrates my life and destroys China’s creative future.” Hohas shown up at promotional appearances of a traditional sword up to an oversized CD with the Chinese character for theft

An executive with Warner Music Asia told the International Herald Tribune, “There is no income from the royalties, so artist in China record single songs for radio play instead of albums for consumers. Stars need to look elsewhere to finance the rock-star lifestyle.”

Free Downloads, the Demise of the Music Industry and China

The Economist reported: Suppose for a moment that the gloomiest predictions for the music business turn out to be correct. Efforts by governments and record companies to shut down file-sharing websites like the Pirate Bay fail. Piracy becomes so entrenched that people simply stop buying legitimate CDs. Customers drift away from Apple’s iTunes store, which sells digital music tracks. They refuse to pay even trivial monthly subscriptions for music-download services like Pandora and streaming outfits like Spotify. Improbable? Not at all. In China, this worst-case scenario has already come to pass. [Source: The Economist, December 2, 2010]

Chinese consumers “won’t pay a penny” for recorded music, says Gary Chen. The music promoter turned digital entrepreneur ought to know. In 2006 he launched Top100.cn, a website which offered a choice of à la carte music downloads and monthly subscriptions. Its prices were low---but not low enough. Chinese music fans were raised on knockoff CDs and are now accustomed to getting hold of music for nothing on file-sharing websites. China will soon have the world’s second-biggest economy, but its legitimate music market is tiny (see chart). So Mr Chen changed tack.

Last year Top100 began to offer Chinese internet users free MP3 music downloads, supported by advertisements. The website resembles a free iTunes store, or a Spotify that lets you download files rather than streaming them. It is the only such service in the world to enjoy support from leading record companies. Top100 streams about 200 million tracks a month. Some 60 percent of its traffic comes from Google, which has invested in the website. This year Mr Chen reckons he will sell about 10 million yuan ($1.5m) in advertising. That would be a trivial sum in America or Britain. In a country where sales of recorded music amounted to just $75m last year, it is not at all bad.

Yet it is not good enough. Top100.cn is profitable only on an operating basis---in other words, before accounting for the money it pays to record companies for their content. Google’s partial withdrawal from China earlier this year, which followed a cyber-attack on the company, reduced its share of the country’s search market and cut traffic to Mr Chen’s website. And Top100 faces fierce competition. Baidu, China’s biggest search engine, also runs a popular MP3 search service. The record companies have sued, claiming that Baidu’s service provides links to pirated songs. But so far the Chinese courts have ruled in the firm’s favor. Mr Chen cites Baidu as his biggest competitor.

If it is almost impossible to sell music, and hard to make money even from running advertisements next to free music, what options are left? Mr Chen has identified two. The first is to charge not for music but for selections of music. Top100 has begun to roll out smartphone apps through China’s many online stores, charging a few yuan for music reviews and recommendations by well-known musicians, together with links to download their suggestions. The hope is that fans will pay for convenient, well-presented bundles of curated music, just as people pay for newspapers and magazines even though, in many cases, they can read all the articles online free. Next year Mr Chen also hopes to roll out a subscription cloud service, which will enable consumers to access their favorite tunes from a variety of devices.

These experiments may not succeed. But Western media companies would do well to watch them. Forward-looking music executives and consultants have come to believe that, particularly for the young, value now resides not so much in recorded music but in the devices that play it, in the services that make it accessible and in the information and networks that allow it to be judged and shared between friends. In a country where other options for getting people to pay for recorded music have been exhausted, Mr Chen is putting those theories to the test. To see the future of the music business, look east.

Pirated DVDs in China

In 2007, it was estimated that 93 percent of the movies sold in China were pirated. Pirated DVDs, VCDs, (video compact discs, cheaper, low-tech versions of DVDs) and videos are widely available on the streets in China. The film industries in China, Hong Kong and Hollywood all lose billions to the pirating of films on videos, DVDs and VCDs that cost only a few cents to make and are sold for around $1 a piece all over China in markets, on street corners and subway station and in the backrooms of legitimate DVD and video stores. Stalls at Silk Street Market in Beijing display licensed DVDS with holograms and every thing but when buys purchase one they are givens a pirated copy.

The latest Hollywood films often appear on the streets as pirated DVDs before the films open in theaters or soon afterwards. Pirated versions of the new Star Wars movies were available on pirated DVDs only days after they premiered at theaters in Beijing. In some places piracy is so rampant that even the pirates worry about there merchandise being copied. The selection of pirated material is amazing. Shops in Chinese cities often has a full catalog of classic films like old Hitchcocks, Truffauts and Hepburn-Tracy films as well as recent Hollywood releases. .

Some pirated DVDs are filmed with hand-held videos in American movie theaters on opening day, then taken to Asia by plane, copied on clandestine CD printing machines, and released on the streets within a few days. Others are made from high-quality screeners, advance copies given out members of the film academy and critics. In many cases the first copies to hit the streets are made with hand-held camcorders in theaters. Better quality ones show up weeks later.

DVDs are often pirated using copies that are available on the Internet. These days many don’t even bother with $1 DVDs they simply share digital file for free on the Internet. Many get them from the popular Chinese movie website Mtime.

Hollywood finds Beijing policy particularly unfair because it fails to crackdown on the pirated DVD trade at the same time it restricts the import of movies, DVDs and music/

Effect of Pirated DVDs on the Movie Industry

Pirated VCDs showed up large numbers in 1995. They robbed the Hong Kong film industry of 40 percent of its business, and forcing video shops and theaters to close down. Pirating is costs the world film industry at about $3 billion a year in lost sales. The biggest losers are Chinese filmmakers and distributors . The six major Hollywood studios lose around $250 million a year.

Competition is very fierce among vendors which is why prices are so low. In 2005, DVDs of recent films could be purchased for as little 60 cents a piece. The quality of DVDs has improved over the years. Sometimes customers prefer the pirated copies to the real thing because they have not been censored by the government and available much more quickly because the distributors don’t have deal with government red tape. The selection at illegal shop is often much better the at the legal ones.

Pirated films are often version that were shown outside China and thus are uncensored. Many of the foreign films sold by pirates were never even shown at neighborhood cinemas and those that were has scenes deleted it.

New released films have to make big money on the opening days because soon after that the film is widely available in pirated version.

Pirated Software in China

About 82 percent of the software used in China is pirated, well above the Asian regional average of 55 percent. Software piracy accounts for billion of dollars in losses to Chinese and foreign software developers every year. The last video games and Microsoft software are widely available in pirated form.

U.S. software companies, Microsoft, WordPerfect and Autodesk won a landmark victory in Chinese courts against a Chinese company---Juren Computer Company in Beijing that was pirating the company's software. Juren was ordered to pay the equivalent of $53,600 damages and stop pirating software. The ruling should, many hoped would set a precedent allowing foreigner companies to punish other pirates and counterfeiters.

Sony released Playstation II much later in China than it did in other places partly over concerns about pirating. A report from an investigation by Sony released in 2004, revealed that at least 10 pirating operations in China were producing 50,000 Playsation consoles a year. In one case the consoles were assembled at prison. In some cases the factories were raided and their owners were fined but the factories quickly resumed operation.

Software piracy produces an estimated $40 billion in losses worldwide in 2006. Countries with the highest rates of software piracy (pirate software as a percentage of software sold): 1) Vietnam (92 percent); 2) Ukraine (91 percent); 3) China (90 percent); 4) and 5) Indonesia and Russia (87 percent); 6) Kazakhstan (85 percent); 7) Serbia-Montenegro (81 percent). The piracy rate in North America by contrast in 22 percent. [Source: Business Software Alliance and International Data Corp. study of 70 countries, 2005]

Pirated Books in China

Piracy is as rampant in the publishing industry as it is in the CD, video and DVD industries. Pirated copies of Harry Potter are widely available. Chinese translations of the book have appeared in pirated version for before the official copies were even published. Pirated Harry Potter books sell for about $3 apiece, a third of the price for originals, are about half the length of the originals and are full of mistranslations and missing passages.

The Harry Potter books are exceptional in that pirates took upon themselves to do eh translator work. Most pirated books are simply copies of the published version. It esteemed that 1 million pirated copies of Who Moved My Cheese were sold in one year. tODAY, Books have regional codes to ensure authenticity.

Sale of Counterfeit Goods in China

Many of the stalls where pirated materials are sold in China are run by old ladies, They often poorly lit and difficult to find. Counterfeit luxury goods are often sold on the streets in cities and markets around the world. They are also widely available on the Internet.

The CDs are often sold on the streets of Chinese cities by teenage boys who make small pay-offs to the police. When the police to decide to nab one of boys, their discs are confiscated and the boys are sent on their way.

Some products are sold by women who roamed the streets with catalogues looking for customers. If someone shows interest in a particular item in a catalogue, the women can direct them to a back alley warehouse where the items are sold.

Silk Street, See Beijing; Xiangyang Market, See Shanghai

DVD sellers in Beijing and Shanghai earn around $120 a month. One seller told the Los Angeles Times, “If the police come I can run away quickly. But it’s all right now, The cops are all on lunch break.” The street vendors often have no idea where they things they sell were made and the makers want to keep it that way.

Pirated CD and DVD Factories in China

The CD and DVD factories in China are very profitable and each year they produce tens of millions of copies. In the 1990s China Records used a $2 million CD making machine purchased from First Light Technologies in Minnesota to turn out one CD every seven seconds at a cost of about 25 cents per CD. Many of the CD plants can also make CD-ROMS, digital audio discs and CD graphics.

Even legitimate businesses are involve in the counterfeiting operations The Suzhou laser disc factory reportedly ran off copies for the California-based Microlink Systems during the day and produced pirated copies at night. Some factories have ties with top military and government officials.

A survey in the mid 2000s found that 774 registered production facilities had a capacity to make more DVDs than they were licensed to produce. Some of these no doubt produced pirated DVDs The profits of products which have no tax or royalty payments are simply to high and easy for producers to ignore.

Other pirated DVDs are produced at black market factories, mostly in the southern province of Guangdong or smuggle din from Hong Kong or Macua. Organized crime is often involved in the production and distribution phases In some cases profit margins are higher and the risks are lower than with heroin.

Fake iPhones and Other Knock-Off Electronics in China

In 2010, before the real things hit the shelves, knock-offs of Apple iPhone 4's and iPad were widely available in malls in major Chinese cities, in many cases with features that weren’t available on the Apple versions such as removable batteries and places for two SIM cards (allowing users to have two telephones numbers) in the case of the new iPhones . The phones, known as Shanzhaiji (“Mountain Bandit Phones”) have touch screen and apps just like the real iPhones and have the Apple logo but sell for hundreds of dollars less. [Source: Keith Richburg,, Washington Post, August 2010]

A vendor who was selling fake iPhone 4s for about $100 in Beijing told the Washington Post, “You can’t tell the difference between this and the real thing.” He said he was selling the fakes at a rate of over 1,000 a month and even though he offered a money guarantee no one had returned a phone, The phones he sold even used real iPhone accessories such as chargers and earphones. Fake iPad were selling for $150 in Shanghai in August 2010 as opposed to $1,000 for the real ones. [Ibid]

Some pirated electronics attempt to be outright copies; others close facsimiles. On the later you can find names like “iPhooe,” “Samsnug,” “Motolora,” “Suny” and “Nckia.” The cheapest iPhone fake is simply called “phone.” On his concerns about being raided by authorities the vendor told the Washington Post, “The police won’t crack down on us---it’s not guns or drugs, why bother? The cellphones aren’t illegal. If its illegal, why is such a big market still open here?” [Ibid]

According to BDA China, a Beijing-based business advisory firm, 38 percent of the handsets sold in China are fakes. Items like iPhones are especially in demand as fakes as the real versions often are much more expensive than they are in the United States or Hong Kong because of imports duties and value added taxes placed on them. Owners of real iPhone more often than possess ones that have been smuggled in rather than purchased in China. BDA reported that in the first half of 2010, 800,000 real iPhones were sold compared to 2.5 million that were smuggled in.

Many fake cell phones are exported to the Middle East and Africa, where there is lot of money to be made selling cheap fakes as the real things. According to the BDA report, illicit phones makers were China’s biggest handset exporters.

Shanzhai Culture

Chinese often describe counterfeits items as shanzhai, a term that originally described the mountain fortress of a bandit. Of late it has become kind of social statement to buy such goods because they support workers and factories in China but the don’t make big profits for foreign companies.

The Chinese word “shanzhai” literally means small mountain village, but it's now used to describe fake products that have names similar to famous brands. It became an accepted name for fake goods after “shanzhai Cellphones” produced by small individual workshops in southern China became popular in the mainland market in the late 2000s. [Source: Xinhua, China Daily, December 30, 2008]

According to Xinhua, “Besides Shanzhai electronic products, of which there are many, there are “shanzhai” movies, ”shanzhai” stars and even a “shanzhai” Spring Festival Gala, a copy of the 25-year-old traditional show presented by CCTV on Chinese Lunar New Year's eve. “shanzhai” has become a culture of its own, symbolizing anything that imitates something famous, especially or people who imitate celebrities.” [Ibid]

“The phenomenon has sparked a public controversy over “whether it is healthy or sick being a copycat,” according to the Beijing-based Guangming Daily. In southwestern China's Chongqing Municipality, a “shanzhai”-version “Bird's Nest” woven by farmers with bamboo attracts wide attention and the “shanzhai”-version “Water Cube” is popular with tourists, the newspaper said. Both are merely copies of the famous Olympics venues in Beijing.” [Ibid]

“shanzhai “represents non-mainstream ideas and innovations, and it's also a new way for common people to express what they want,” said Li Zonggui, a professor at Sun Yat-Sen University in south China's Guangdong Province. Xie Xizhang, a literature critic, said that taking the “shanzhai” Gala as an example, when the traditional CCTV program became less and less appealing to the audience, the “shanzhai” version sprang up naturally to attract people for variety. “Despite its coarse techniques and operation, “shanzhai' culture meets the psychological demands of common people and could be a comfort to their minds,” Xie said.” [Ibid]

Shanzhai Creativity and Innovation?

In September 2011, Patti Waldmeir of Slate.com wrote: “Indeed, some Chinese businessmen and even government officials believe that faking things can be creative in its own right---provided the imitation adds value.” It “encompasses things such as HiPhone, a knockoff iPhone that can accommodate two sim cards, a feature popular with globetrotting Chinese travellers---and not available from the real thing. One of the most famous examples of shanzhai culture is the Chinese search engine Baidu, which many consider a knockoff Google---but with better music search functions. And recently, a shanzhai amusement park opened near Shanghai, based on the online game World of Warcraft. Who but a Chinese counterfeiter would think to turn a virtual game into a real-world amusement park? [Source: Patti Waldmeir , Slate.com, September 17, 2011]

A senior Chinese government official recently defended the role of shanzhai in China's budding culture of innovation. Liu Binjie, head of the China National Copyright Administration, said shanzhai "is a sign of the cultural creativity of the common people", which "fits a market need" in China.

Counterfeiting, Piracy and the United States

Pirated CDs, DVDs and software cost United States music, movie and software businesses at least $3 billion a year. In May 2011, China was listed for the seventh year by the U.S. Trade Representative’s office as a country with one of the worst records for preventing copyright theft.

The United States has repeatedly urged China to strengthen its protection of copyrights and patents and crackdown on piracy and counterfeiting. Often when the news about the trade imbalance with China is announced Washington threatens China with tariffs and WTO reports unless it does more t tackle the piracy issue The most serious crackdowns by the Chinese on piracy seem to take place on the eve of meetings between Chinese and American leaders.

China was on the 2005 U.S. piracy list along with 13 other nations. Hollywood studios have sent representatives to China to put pressure on authorities to crack down more on counterfeiting and run public service campaign to educate consumers.

Microsoft has 75-person anti-piracy team that devotes much of it attention to China. In November 2007, it made a deal with China’s second largest computer company, Founder Technology, to pre-install Microsoft’s Windows as part of its effort to combat piracy.

Three-D technology is being offered as a means of thwarting piracy in the film business. Film makers in the United States are trying to get Chinese to buy their DVDs on the grounds that the quality is better than pirated versions, which sometimes end before the movie is even over, and selling them at places like Wal-Mart, Carrefour and the Chinese bookstore chain Xinhua.

Piracy is especially sensitive at a time when Washington and other Western governments are trying to create jobs by boosting exports. In 2009, the World Trade Organization upheld a U.S. complaint ago that Beijing was violating its trade commitments by failing to root out the problem. Rampant copying also has hampered Beijing's efforts to attract technology industries because businesspeople say companies are reluctant to do high-level research in China or bring in advanced designs for fear of theft. China’s commerce minister said that enforcement of piracy laws is necessary for China to develop its own creative industries.

Fake Phones Losing Their Appeal in China

Reporting from Beijing, David Pierson wrote in the Los Angeles Times, “Xiong Mingjian is often crushed into a corner during his tedious subway commutes, but passing the time has been easy since he bought a nifty new cellphone. The 27-year-old store clerk surfs the Internet and taps away at games on his Motorola Defy, one of an increasing number of popular high-end mobile phones that are helping China shed its label as a knockoff haven. [Source: David Pierson, Los Angeles Times, October 4, 2011]

For years, copycat cellphones have thrived in a country famed for counterfeiting many things, such as Gucci handbags, Hollywood DVDs and, most recently, Apple retail stores. It's a market fed by shadowy factories turning out low-cost models bearing names such as BlockBerry and HiPhone 4. But Chinese bootleggers are now losing ground to the iPhones and other high-end gadgets they once copied. "People want the real thing," said Guo Feilong, a vendor at a massive electronics market in northwest Beijing where hundreds of closet-size stalls sell genuine and pirated phones. "Prices have gone down so much, why would anyone need to buy a fake”"

Factory orders for unlicensed phones, better known in China as shanzhai, or outlawed, phones, have been declining rapidly over the last few years, according to market researcher IHS iSuppli. Slightly more than 24 million shanzhai phones were ordered in China last year; that's down about half from the peak in 2007 when the devices accounted for 20 percent of all shipments. Today, shanzhai handsets represent just 7 percent of new factory orders for phones and could be half that within a few years. Meanwhile, smartphone sales are soaring. More than 131 million are in use in China, up from 52 million in 2009, according to Analysys International, a Beijing research firm. The average price has dropped below $300, putting them within reach of white-collar workers.

The trend bodes well for brands such as Apple, Finland's Nokia and South Korea's Samsung, which are battling Chinese makers to capture a greater share of the world's largest cellphone market. "We're looking at a billion [Chinese] cellphone users in the next couple of years," said David Wolf, chief executive of Wolf Group Asia, a Beijing consulting firm. "As important as North America and Europe has been for mobile devices, soon we'll see the tail wagging the dog. Chinese consumers will eventually dictate what the rest of the world will use."

Indeed, major parts manufacturers are developing their own smartphones for the Chinese market that will be significantly cheaper than current offerings. Apple reportedly is working on a lower-cost, mass-market Chinese iPhone; the company did not respond to requests for comment.

Reasons Why Fake Phones Are Losing Their Appeal in China

David Pierson wrote in the Los Angeles Times, “Falling prices for brand-name models are just one reason crude clones are becoming passe. International pressure led to periodic crackdowns by Chinese authorities. Bad press about exploding batteries and high radiation in some flimsy phones scared off some customers as well. Chinese consumers increasingly want devices that allow them to surf the Web, play games and download apps, a level of sophistication that's tough for some low-rent producers to deliver. Some upwardly mobile city dwellers wouldn't dare risk losing face by carrying a knockoff phone. [Source: David Pierson, Los Angeles Times, October 4, 2011]

"After playing with my friends' smartphones, I had to get one of my own," said Xiong, gripping a $275 touch-screen Motorola handset outside a Beijing subway station. "I would never buy a fake one because it wouldn't be able to do the same things."

Still, demand for shanzhai phones remains strong in rural areas and among migrant workers earning only a few hundred dollars a month. "People in China are practical," said CK Lu, an analyst with research firm Gartner Inc. "It's not shameful to use fake phones any more than it is to carry a fake Louis Vuitton bag."

Trend Away from Fake Phones and Shanzai Producers

David Pierson wrote in the Los Angeles Times, The trend away from fake phones “spells trouble for cellphone counterfeiters, whose hub is the southern industrial city of Shenzhen. Aided by China's weak protection of intellectual property and an abundant supply of low-cost semiconductors, hundreds of factories sprouted over the last decade, churning out knockoff handsets. These manufacturers found buyers not only in China but also in emerging markets in Africa and the Middle East. [Source: David Pierson, Los Angeles Times, October 4, 2011]

Declining profits spurred some counterfeiters to turn to making knockoff tablet computers instead. But others have decided to go legitimate by developing their own high-end cellphones. Wanxiang, a Shenzhen company that makes and sells shanzhai handsets such as the iPhome A8, is planning to release a trademarked 3G smartphone this year that sells for $230. The manufacturer has gone so far as to develop an online app store, hoping that users will get hooked on the firm's software.

"Everyone can use the same hardware and offer the same prices, but to stay competitive you need your own applications and R&D," said Nuo Long, a Wanxiang manager. "So we decided to invest. This year alone, at least 60 or 70 phone makers registered new brands and trademarks." Nuo said the company was inspired by two upstart Chinese phone makers generating buzz for their surprisingly capable devices. Meizu and Xiaomi have both developed phones aimed to compete with Apple.The Xiaomi phone, which is priced at $312 and uses Google Android software, is half the price of an iPhone sold in China and boasts the most powerful processor ever installed on a mobile handset.

Oded Shenkar, a China specialist at Ohio State University and author of "Copycats: How Smart Companies Use Imitation to Gain a Strategic Edge," said none of this is especially odd. Chinese manufacturers are now poised to begin innovating after years of replicating foreign products and business models, he said. "Chinese phone makers are learning to play the game by putting a twist on existing technology and putting a patent on it," Shenkar said. "Being able to take a blueprint and turn it into a product in a very quick time will serve you very well when you eventually have your own concept," he said. "China is not the first or only imitator, but it's the first imitator that has tremendous capability."

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

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© 2008 Jeffrey Hays

Last updated March 2012


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